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The Effects of Bussiness Cycles on Growth

In: Economic Growth: Sources, Trends, and Cycles

  • Antonio Fatás

    (European Institute of Business Administration)

This paper studies the link between business cycles and long-term growth rates. We present empirical evidence that uncovers interesting and significant interactions between cycles and growth. We show that business cycles cannot be considered as temporary deviations from a trend and that there is a strong positive correlation between the persistence of short-term fluctuations and long-term growth rates. A simple endogenous growth model where business cycles affect growth can easily replicate this correlation. We then study the link between volatility and growth. We show that countries with more volatile fluctuations display lower long-term growth rates. We also find evidence that there is a non-linearity in this relationship. The effect of business cycles on growth is much larger for poor countries or countries with a lower degree of financial development.

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This chapter was published in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Economic Growth: Sources, Trends, and Cycles, , chapter 7, pages 191-220, 2002.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v06c07pp191-220.
Handle: RePEc:chb:bcchsb:v06c07pp191-220
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  2. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
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  7. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December.
  8. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
  9. Larry E. Jones & Rodolfo E. Manuelli & Henry E. Siu, 2000. "Growth and business cycles," Staff Report 271, Federal Reserve Bank of Minneapolis.
  10. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
  11. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  12. Cogley, T., 1989. "International Evidence On The Size Of The Random Walk In Output," Working Papers 89-02, University of Washington, Department of Economics.
  13. Larry E. Jones & Rodolfo E. Manuelli & Ennio Stacchetti, 1999. "Technology (and Policy) Shocks in Models of Endogenous Growth," NBER Working Papers 7063, National Bureau of Economic Research, Inc.
  14. John Shea, 1998. "What Do Technology Shocks Do?," NBER Working Papers 6632, National Bureau of Economic Research, Inc.
  15. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  16. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
  17. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," IDB Publications (Working Papers) 5919, Inter-American Development Bank.
  18. Ben S. Bernanke & Refet S. Gürkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72 National Bureau of Economic Research, Inc.
  19. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
  20. Martin, Philippe & Rogers, Carol Ann, 1995. "Stabilization Policy, Learning by Doing, and Economic Growth," CEPR Discussion Papers 1130, C.E.P.R. Discussion Papers.
  21. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  22. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
  23. Martin, Philippe & Ann Rogers, Carol, 2000. "Long-term growth and short-term economic instability," European Economic Review, Elsevier, vol. 44(2), pages 359-381, February.
  24. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  25. de Hek, Paul & Roy, Santanu, 2001. "On Sustained Growth under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 801-13, August.
  26. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
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  28. Stadler, George W, 1990. "Business Cycle Models with Endogenous Technology," American Economic Review, American Economic Association, vol. 80(4), pages 763-78, September.
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